INVESTMENT FOR DEVELOPMENT PROJECT
SECOND NATIONAL REFERENCE GROUP (NRG) MEETING OF THE SECOND NATIONAL REFERENCE GROUP (NRG) MEETING OF THE
BANGLADESH CHAPTER BANGLADESH CHAPTER
August 8, 2002: Dhaka, Bangladesh
Draft Summary Report of the Proceedings
The current report provides a brief summary of the 2nd National Reference Group (NRG) Meeting of Bangladesh under the project Investment for Development (IFD). The meeting was
held on August 8, 2002 at the conference room of Bangladesh Enterprise Institute (BEI), Dhaka.
The main objective of the 2nd NRG Meeting was to discuss the output of the preliminary draft of Report B prepared by the Bangladesh Enterprise Institute (BEI), and other related issues. The purpose of the NRG meeting was to provide inputs for the report, particularly in respect of policy recommendations on FDI. The agenda encompassed a few issues such as i) an overview of impact of FDI and assessment of government policy towards FDI, ii) sector studies, i.e., specific issues related to RMG & Textile, Cement, and Telecom sectors, and iii) policy action, i.e., recommendations about changes in general policy to encourage inflow of FDI and benefits from FDI.
An invitation letter along with a draft agenda was sent to the participants about two weeks ahead of the meeting. Most of the participants had been selected previously with a view to having representatives from all sections of civil society.. In addition, invitations were extended to experts in the relevant sectors so as to receive inputs for case studies. Thus, the panel included representatives and experts from the country’s leading business federations, parliament, various government agencies, former policy makers and practitioners, academia, think-tanks, and representatives from other components of civil society. The President of BGMEA, President of BTMA, a former minister, among others, were present in the meeting. The representative from CUTS, India, Ms. Sanchita Chatterjee also attended the meeting.
The meeting started at 3:00 P.M, and ended at 7:00 P.M. without any break. Ambassador Farooq Sobhan, President, BEI and former Foreign Secretary of Bangladesh presided over the meeting. He also steered the entire meeting as the moderator . After the introductory remarks by Ambassador Farooq Sobhan, Dr. Atiqur Rahman made a power point presentation on the draft of the report B. Presentation of the keynote paper was followed by two presentations. First, Mr. Matin Chowdhury, the president of Bangladesh Textile Mills Association made apower point presentation on FDI in the textile and RMG sector. Mr. Matlub Ahmed, Chairman, Nitol group, spoke about FDI in cement sector. After their presentations, general discussiuon on report B and the sector specific issues took place for more than 2 hours.
THEMATIC PRESENTATION OF THE DISCUSSION
Abstract of the presentation of report B:
The report B (draft) focused on four issues: i) a brief overview of FDI policy and FDI inflow in Bangladesh, ii) summary presentation of civil society perception about different aspect of FDI, (iii) case studies of three sectors (Textile and RMG, Cement, and Telecom) that are important in terms of magnitude of FDI and its impact on the economy, and iv) policy recommendations to attract more FDI.
Despite one of the most liberal policies on foreign investment and economic reform, FDI inflow into Bangladesh has not been that encouraging. The civil society perception about the major reasons for attracting less FDI includes poor overall investment climate such as inadequate infrastructure, lack of good governance, law and order problem, continuing impasse between the government and the opposition resulting in strike (hartal), bureaucratic inertia etc. According to the perception of civil society, sectors that are important in terms of the magnitude of investment and impact on the economy includes power and energy, gas, RMG, textiles, telecom etc. Civil society, in general, thinks that FDI has had a positive impact on the economy. Negative aspects of FDI did not receive much support from civil society. Civil society supports a more liberal
FDI policy, although most of the persons also support imposition of restrictions on various aspect of FDI so as to enhance benefit from FDI to the country.
The paper then makes an overview of the growth of the three sectors, role of FDI in their growth, and effect of FDI in those sectors. Although foreign investment in the RMG and textile sectors has been quite considerable, it constitutes only a small fraction of total investment in this sector. Foreign investment in this sector has slowed down in recent years because of the perceived uncertainty of RMG exports during the post MFA era. The cement sector experienced a lopsided growth in the sense that, investment was made in grinding mills only, and there is now over capacity installation resulting in fierce competition. The implementation of the Lafarge Surma integrated cement factory may result in driving some of the grinding mills out of the business. Foreign investment in the telecom sector is a recent phenomena that resulted in huge expansion of cellular phones. More foreign investment is expected to come in this sector in the near future.
The paper suggests some policy measures. First, there is a need for some general policy changes to attract FDI. These includes, improving the investment climate through appropriate administrative, legislative, and judicial reforms, improving the one stop service of BOI through setting up of industrial parks, making BOI more dynamic through other measures, identification of new markets and new products for export and encouragement of FDI in these sectors, assigning importance to the growth of the local market, development of infrastructure and human resources, improving the image of the country through appropriate measures, strengthening economic and commercial diplomacy with the countries who are potential investors etc. For the RMG and Textile sectors, policies must be taken to reduce the lead time, have intra RMG product diversification, encourage FDI in high value added products, and develop an efficient backward linkage industry. In the cement sector, appropriate policies must be taken to enforce quality, safety, and environmental regulations and to attract FDI in clinker production and integrated cement plants. Sourcing of raw materials in the spirit of sub-regional co-operation is very important in this regard. To attract FDI in the telecom sector, further deregulation of the telecom sector is of vital importance. Telecom service should be extended beyond basic phone service.
The response to the presentation and the general discussion in the meeting was mainly confined to the environment for foreign investment in Bangladesh focussing on why FDI inflow is low, sectoral case studies, and policy issues on FDI. The discussion is summarized below.
Despite Good Policies, FDI is Low
Bangladesh has adopted one of the best policy packages toward FDI. Investment policy is one of the most liberal for foreign investors. Despite this, FDI inflow is not encouraging. In addition to poor overall investment climate because of inadequate infrastructure, poor governance, law and order problems, etc that were underscored in the first NRG meeting, several other factors inhibiting FDI inflows were identified. These are as follows.
; Lack of profit opportunities: Whilst an attracting policy package is a necessary condition to
attract FDI, policies and incentives alone are not enough. Attracting FDI today has become
very competitive. Foreign investors choose a country to invest where there are both good
policies and opportunities to make a good rate of return on investment. For a host of reasons,
cost of doing business is high in Bangladesh. Prospect of profitable investment in the EPZ
and elsewhere is being eroded by Bangladesh’s lack of competitiveness in the world.
; Lack of consistency between policies and reality: There are many gaps in terms of written
policies and the difficulties faced by foreign investors on the ground. While Bangladesh has
adopted one of the most liberal and open FDI regime, there is no commensurate change in
the outlook of the government functionaries. While government encourages FDI, the
perception about the need of FDI remains clouded and ambiguous. Bangladesh also lacks a
stable long term policy towards investment. Some of the current policies contradicts the
industrial policies of 1991. All these have a negative impact on the perception of the foreign
investors about the country as an ideal country for investment.
; Lack of local partners: Foreign investors get confidence if they see that the domestic
investors are forthcoming. Particularly, local collaborators may encourage foreign
investment through joint venture. Local investors in Bangladesh appear to be shy in
collaborating with foreign investors in joint ventures.
Steps Needed to Attract FDI
The meeting also discussed about the needed steps to attract FDI. Following steps may attract FDI.
; Cost reduction: The fundamentals for attracting foreign investment are (i) competitiveness
(ii) image building of the country. Profitability of investment must be increased through
ensuring cost competitiveness. Cost of business should be reduced by improving
infrastructure facilities, and ensuring law and order etc. Steps should be taken to for stable
supply of utilities at reasonable rate. Government has to provide infrastructure, and private
sector has to take advantage and utilize its maximum capacity. A container terminal financed
and operated by foreign investors could be considered.
; Policy Consistency: Before encouraging FDI, there is a need to build up a national
consensus about the role of FDI. A clear perception about the need for FDI and what
benefits it brings is needed to be addressed. Policies and actions must be consistent, so that
no wrong signal is conveyed to the investors. Policies must be well communicated to
investors and concerned home regulatory bodies. It is felt necessary to implement the
existing regulations effectively to improve overall investment climate. There should be clear
and consistent policies about restrictions, if any, on import of machinery, employment of
foreign technicians and mid-level managers etc. Restriction should not be imposed after the
investment is made. Stability in policies should be maintained as much as possible.
1. Governments contracts about the large foreign investment must be made transparent; Proper treatment of foreign investors: Perception of the investors about the host country
plays a important role in attracting FDI. Foreign investors should be treated very cordially.
There should be a non-discriminatory attitude between foreign and local investors. All
foreign investment in all sectors (other than restricted list) should be approved, unless a
negative impact is proven.
; Sub-regional cooperation: Regional cooperation may be useful for tapping investment
complementarities. Sub-regional cooperation may play a special role in enhancing
investment, particularly in some sectors. Sub-regional cooperation is needed in sourcing
1 KAFCO eas regarded as one of the non-transparent FDI.
raw material for cement sector from North East India. And the same cooperation will be
necessary in marketing the finished product. Similarly, Indian fabric producers may relocate
some of their industries to Bangladesh to cater for the needs of the export oriented RMG of
Bilateral Free Trade
In the context of promotion of FDI, the issue of bilateral free trade appeared as an important concern for Bangladesh. The civil society members discussed the possibility of free trade between Bangladesh and USA, and Bangladesh and India. As we know, India and USA are the two major trading partners of Bangladesh. USA is also the largest foreign investors in Bangladesh. Free trade agreement between USA and Bangladesh, may ensure Bangladesh export maket in US, which in turn may encourage foreign investment in export oriented or export supporting industries. Both countries may gain through free trade. However, formation of FTA with US brings in many questions that have to be resolved. First, we have to define what goods will be allowed zero tariffs. Second, we need a consensus about rules of origin. We will need a rule about whether the goods actually need to be produced in the US or Bangladesh. For example, a product coming from Taiwan may have a very large US content. On the other hand a US manufacturing industry may have a plant outside the US (say Ford in India). Despite these complexities, there should be some serious thinking about an FTA agreement.
Specific Issues for Textile and RMG Sector
The textile sector made a notable development in the last couple of years. Domestic textile industry can now meet virtually 100% of cotton yarn requirement for circular knits, 40% cotton fabric requirements for export oriented RMG, and 85% of domestic requirements for cotton yarn and fabric. Currently some one-third of export oriented RMG is made from local inputs, and there is a scope of producing fabric locally to support at least another one third of needs by the export oriented RMG sector. Domestic demand for fabric will continue to grow with increase in population and per capita income. Thus, despite the recent growth of the textile sector, there is still huge demand for new investment in the textile sector.
FDI in the textile sector is not encouraging. Small foreign investment in textile sector has been concentrated in towels, knit fleece fabric, acrylic dyeing, dyeing and printing, and RMG. Lack of definite long term sectoral policy and reliance on ad-hoc incentives, lack of focus on joint ventures by the local investors, lack of trained mid-level managers and technicians along with other common factors such as poor infrastructure, law and order problem, corruption, bureaucratic inertia, and the negative image of the country are responsible for attracting less FDI in the textile sector. However, there are ample opportunities for foreign investment in the backward linkage industries in the textile sector. Investment in these sub-sectors is desirable to face the uncertainty about availability of raw material for RMG in the post MFA area and to reduce lead time. Opportunities exists in the domestic market for cotton as well as blends and synthetic fabrics. In the export oriented field, there is scope for investment in spinning sub-sector to produce yarn for cotton woven as well as synthetic and sweaters. For fabrics, there are large opportunities in synthetic for both woven and knit garments. Also there is good scope for specialized fabrics.
Several issues deserve consideration regarding FDI in the textile sector. First, relocation of used plants with low capital cost may be encouraged. Relocation will provide access to both technology and market. BOI may go abroad, esp. in textiles countries that are closing down factories to motivate investors to relocate their factories in Bangladesh. Secondly, local partners for joint investment may be identified. BOI, foreign chambers, and other relevant associations should assist in matching them with appropriate foreign partners. Also, there must be steps to reduce cost and increase efficiency related to transport, port charges, banking service etc. Like investment in other sectors, creation of industrial estate with all infrastructure is important for attracting FDI in the textile sector.
One of the principal efforts of BGMEA and the government of Bangladesh is to get duty-free access into the US market. However, a strong textile lobby in the US is resisting this. A good potential tradeoff would be if we get duty free access, then we would be willing to encourage and facilitate relocation of American textile plants to Bangladesh. We are already buying their cotton, and relocation will increase import of US cotton.
Specific issues for cement Sector:
Basic need for development of the cement sector is limestone (raw-material), power, and transport. Although the river network of Bangladesh provides a scope of cheaper mode of transport through inland waterways, cement industry could not develop much in this country because of absence of limestone. Bangladesh had only one cement factory located at Chhattak based on the limestones from Assam, which could meet only a fraction of domestic needs for cement. As a result Bangladesh became a cement importing country. However, the situation has changed in recent years. Growth of the construction sector since late 1980s, success of Chittagong Cement and Clinker, along with East Asian financial crisis resulted in huge investment in clinker grinding mills in Bangladesh, most with foreign investment. As a result there is now over capacity installation. Only one and the major foreign investment, i.e., Lafarge was in the right direction. Lafarge is an integrated cement plant which is now under construction; it will produce cement using the limestone from Assam. The basic problem in the cement factory is now over capacity installation which has resulted in fierce competition, and the sourcing of raw materials. Against this backdrop, following policy actions may be seriously considered.
; Bangladesh should not encourage any further growth of grinding mills, it should encourage
FDI in clinker producing units only
; Limestone should be sourced from Assam. (Myanmar also have limestone). Actually Assam
has only limited scope to use their own limestone because of lack of power, whereas
Bangladesh has its source of power, i.e., gas. Hence, appropriate subregional copperation
may be extremely useful for the development of the cement industry.
; Chhatak cement factory has huge underutilized capacity. It may be revitalized so as to
produce limestome for the local grinding mills. It may be even handed over to lafarge for
better utilization of its capacity.
; Bangladesh should work on maximum use of domestically produced cement such as in road
construction and also explore alternative uses
; Bangladesh should explore the possibility of cement export in the bordering regions of the
Telecommunications and ICT provide vast markets not only globally, but also in Bangladesh. The current market in Bangladesh is about 3600 crore taka, just in the voice industry. And the demand for this market is expected to rise to 6.4 billion dollars in 5 years. Bangladesh could absorb 160 lakh telephones for the basic service in 5 years. Tele density in Bangladesh is only about 1%, indicating its tremendous scope for expansion. Development of this sector not only can provide telecom facilities to the hitherto uncovered people but also can enhance the productivity of other sectors in the economy and bring down corruption in doing business. The sector is very ideal for foreign investment. Bangladesh is expanding its physical infrastructure in this area such as submarine cables, fiber optics, etc. A large number of educated unemployed people can be trained for absorption in the telecom and IT sector. Foreign investment that brings technology and money may complement available resources. Appropriate government policies are needed for the merger of IT sector with other productive sectors. As a test case, Bangladesh may start application of IT in the textile sector to examine its impact on productivity.
nd NRG Meeting Appendix A: Agenda of 2
Second National Reference Group (NRG) Meeting on Investment for Development
Investment for Development Project, Bangladesh Chapter
Venue: BEI conference room, Gulshan, Dhaka 1213
Time: 3:00 P.M to 7.00 P.M
; An Overview of Effects of FDI and assessment of government policy towards FDI
Discussion should focus on the positive and negative impact of FDI in general, government
policies to attract FDI, effectiveness of government policies etc
; Sector Study: specific issues related to RMG & Textile, Cement, and Telecom sectors.
Discussion should focus on the positive and negative impact of FDI in each sector, difference
in performances in local and foreign firms in each sectors, policy relevance in attracting FDI
in those sectors, mismatch between policy and its implementation in each sector, need for
sector specific policy change to attract FDI etc.
; Policy Action:
Recommendation about changes in general policy to encourage inflow of FDI, policy
recommendation to maximize benefit from FDI, recommendations about changes in specific
policies, identification of action matrix, sequencing of policies and action etc